The Whaley Corporation has two bonds outstanding. The first bond, Bond A, will make annual payments of $90 for four years and also make a payment of $1,000 at the end of four years.
The second bond, Bond B, will make annual payments of $90 for eight years and also make a payment of $1,000 at the end of eight years. The current market interest rate is 9% per year.
Show that each bond currently sells for $1,000. If market interest rates increase from 9% to 11% per year, what are the new prices for each of the bonds?
What does this tell you about the relation between changes in interest rates and changes in bond prices?
What does this tell you about the sensitivity of bond prices to changes in interest rates as a function of the number of years they are scheduled to make payments?